A Guide to Accrued Expenses and How to Record Them
At the end of every accounting period, there are costs your business has incurred but hasn't been billed for yet. Your employees have worked hours that won't show on a payroll run until next week. Your electricity meter has been spinning all month, but the bill won't arrive for another fortnight. Your accountant has racked up hours on your books but will invoice you next month.
If you only record expenses when the invoice lands, these costs vanish from your financial statements. Your profit looks artificially high. Your balance sheet doesn't show what you actually owe. You're making decisions based on incomplete data.
A guide to accrued expenses and how to record them fixes this. An accrued expense is a cost you've incurred but haven't been billed for yet. Recording it ensures your profit figure and balance sheet tell the real story.
What are accrued expenses?
An accrued expense is money you owe for something you've already received or consumed, but the invoice hasn't arrived yet. It's a liability — a debt sitting on your balance sheet.
Think of it as the opposite of a prepayment. When you prepay, you write the cheque first and get the benefit later (annual software subscription, paid upfront). When you accrue, you get the benefit first and write the cheque later (your accountant works this month, bills you next month).
The most common accruals
Wages and salaries. If your accounting period ends Friday but payroll doesn't run until Wednesday, you owe wages for work already done. This is almost always the single biggest accrued expense for any business with employees.
Utilities. Electricity, gas, water, phone lines — you use them throughout the month but get billed weeks later. The cost belongs in the month you consumed it, not the month you paid.
Loan interest. Interest accrues daily. Your payment might be due on the 15th of next month, but interest has been building since the 15th of this month. Record it in the correct period.
Professional fees. Your accountant, solicitor, or consultant may be working on your business right now but won't invoice until their month-end.
Rent. If it's due but unpaid at period-end, it's accrued. (This one trips people up because rent is sometimes paid in advance — that's not an accrual, it's a prepayment.)
Taxes. Tax liabilities build up over the period even though you don't pay them until specific dates.
Employee bonuses. Bonuses earned in one period but paid in another should be accrued when the obligation becomes certain.
Why accruals actually matter
Your profit figure becomes meaningful
The matching principle — explained in HMRC guidance on accounting methods — says you should record expenses in the same period as the revenue they help create. If you did work in March that generated March revenue, but the bills for materials or contractors don't arrive until April, your March profit looks inflated if you wait to record the costs in April.
Accruals fix this. Each period gets the costs it actually incurred, so your profit tells you the genuine story month to month.
Your balance sheet stops lying
Without accrued expenses, your liabilities are understated. If you owe £5,000 in wages but haven't recorded them, your balance sheet says you're in better financial shape than you actually are. That's not useful information for making business decisions.
Month-to-month comparison becomes real
Without accruals, the month where a big invoice lands looks disastrous while months in between look artificially rosy. Accruals smooth this out so you can spot which months your business actually performed better or worse.
Tax compliance
Depending on your business structure, accruing may be required for tax purposes. UK businesses using traditional accruals (not cash basis) must record expenses when incurred, not when paid. Check HMRC guidance to see which method applies to you.
How to record accrued expenses
Writing the accrual journal entry
At period-end, identify each expense you've incurred but not been billed for. Write a journal entry like this:
| Account | Debit | Credit |
|---|---|---|
| Expense account (e.g., Utilities) | £500 | |
| Accrued expenses (liability) | £500 |
The expense hits your profit & loss for the right period. The liability hits your balance sheet. That's it.
When the actual bill arrives
Two common approaches:
Approach 1: Reverse the accrual, then record normally
Reverse the accrual:
| Account | Debit | Credit |
|---|---|---|
| Accrued expenses (liability) | £500 | |
| Expense account | £500 |
Then record the invoice through your normal accounts payable process. The expense gets recorded again at the actual amount.
Approach 2: Record the bill directly against the accrual
Post the invoice with the accrued expense account as the offset:
| Account | Debit | Credit |
|---|---|---|
| Accrued expenses (liability) | £500 | |
| Accounts payable | £500 |
If the actual amount differs from your estimate, adjust the difference to the expense account.
When your estimate is off
Accruals are estimates by definition. You don't always know the exact number until the bill lands. If reality doesn't match your estimate:
- Bill is higher: Record the extra as an expense in the current period
- Bill is lower: The reversal creates a small credit that reduces the expense
These variances are normal and expected. You're aiming to get the costs in the right period, not necessarily to the exact pound.
Setting up an accruals process
Step 1: List what needs accruing
What expenses show up every month but don't get invoiced until later? Write them down:
- Wages for time worked but not yet paid
- Utilities (electricity, gas, water, phone, internet)
- Professional fees (accountancy, legal advice, consulting)
- Loan interest
- Rent (if paid in arrears)
- Sales commissions
- Employee benefits or bonuses
Step 2: Pick your estimation method
For each item, decide how you'll estimate the amount:
- Wages: Days worked × your daily labour cost
- Utilities: Use last month's bill, or calculate a monthly average
- Professional fees: Call and ask what they're charging (not a guess — an actual figure)
- Loan interest: Loan balance × annual rate ÷ 365 × days since last payment
Better estimates mean fewer adjustments when the real bill lands.
Step 3: Build a month-end checklist
Create a simple list: one line per accrual, the estimation method, and the accounts to use. Tick them off each month. This stops you forgetting anything and keeps the process consistent.
Step 4: Automate if your software supports it
If the same accrual happens every month (wages, utilities, interest), most accounting systems can set up a recurring journal entry that posts automatically. No data entry. No missed accruals. Relentify accounting supports this.
Step 5: Reverse at the start of the next period
At the start of each new month, reverse the previous period's accruals (unless your software does this automatically). Then record actual expenses as bills arrive.
Best practices for accruals
Be consistent. Use the same estimation method every month. If you estimate utilities differently in January than in February, your numbers won't compare cleanly.
Accrue only material items. A £20 phone bill can wait for the actual invoice. A £5,000 consulting fee should be accrued. Set a materiality threshold appropriate for your business — typically anything above £100–500 depending on your annual turnover.
Document your estimates. Write down how you estimated each accrual. If you accrued £800 for utilities based on last month's bill, note that. It helps during review, supports questions from your accountant, and makes it easier if someone else takes over the process.
Review your accrued expense balance regularly. Look at it on your balance sheet monthly. If an "accrued utilities" balance has been sitting there for three months, something's wrong — either the expense never happened (reverse it) or you recorded the invoice but forgot to clear the accrual.
Don't over-accrue. Accruals are for accuracy, not conservatism. Deliberately over-accruing to make your profit look smaller is not sound accounting practice. Estimate reasonably and adjust when you know the actual numbers.
Frequently Asked Questions
Q: What's the difference between accrued expenses and accounts payable? A: Accounts payable is something you have an invoice for but haven't paid yet (amount is known and documented). Accrued expenses are costs you've incurred but haven't been invoiced for yet (amount may be estimated). When an invoice arrives for an accrued expense, it typically becomes an accounts payable.
Q: How material does an expense need to be before I accrue it? A: That depends on your business size. A sole trader might set the threshold at £50; a 20-person business might use £500. Set a threshold and stick to it. Anything above it gets accrued; anything below waits for the actual bill.
Q: Do I have to reverse accruals at the start of the next period? A: Not if your accounting software lets you record the invoice directly to the accrual account. But reversing them is cleaner — you avoid stale accrual balances sitting on your books indefinitely. Many accountants prefer the reversal method.
Q: What if the actual bill is different from what I accrued? A: Completely normal. Reverse the accrual, then record the actual invoice. The difference becomes an adjustment to the expense account. These accrual variances are so routine that accountants expect them.
Q: Can accrued expenses affect my tax bill? A: Yes. If you're using traditional accruals accounting (not cash basis), HMRC expects you to accrue expenses. Cash basis is only available to sole traders and small partnerships under certain conditions. Check which method applies to your business.
Q: Should I accrue expenses if I use cash-basis accounting? A: No. Cash basis means you record when you pay, not when you incur the cost. That's the entire premise of cash basis. Accruals are only for businesses using traditional accruals accounting.
Q: How do I make sure I don't forget an accrual each month? A: Use a checklist. Even a simple spreadsheet listing your accrual items and estimated amounts, ticked off at month-end, will catch the ones you'd otherwise miss. Or set up recurring journal entries in your accounting software so they post automatically.
Q: Do accrued expenses affect my cash flow? A: No. Accrued expenses are accounting entries only — they don't touch your bank balance. They ensure your profit and balance sheet are accurate, but your actual cash position is separate. That's why understanding how to track business expenses alongside accruals matters.
Start this month
If you're not currently accruing expenses, start with your next month-end close. Pick the two or three biggest expenses that regularly arrive after period-end — typically wages and utilities — estimate the amounts, and post the accrual journals. The accuracy improvement in your financial statements will be immediate and substantial.
If you need accounting software that handles this smoothly, Relentify's accounting platform supports recurring journal entries with automatic reversal, so you set it up once and it runs itself every month.